Market Seeking Comfort Level Where Negatives Are Discounted

Recap: With the DJIA at 12,143, my August 1, blog headlined “Odds Favor Rally Failure – Another Downleg,” in which I targeted DJIA: 10,700 -10,830 (S&P 500 1150) as levels where initial support could be expected. It was a classic head fake situation where the Street expected a big “relief” rally upon news that the U.S. did not default.

The market gained downside momentum as it broke a June 16 “technical” support level then accelerated its nosedive when S&P’s Rating Service downgraded The United States to AA+ from AAA along with a host of government related securities and munis.

Yesterday the DJIA closed at the upper end my projected downside target of 10,700- 10,830 but penetrated my S&P 500 target of 1150.

Today, it is rebounding for two reasons. One, even an old waterlogged playground softball bounces if it is slammed hard enough on the ground, and two, the Street expects the Fed to “do something” to stop the bleeding. Its Federal Open Market Committee (FOMC) meets today and generally has a press release at 2:15 today. Fed chair Bernanke is not expected to hold a news conference, but today may be an exception. They still have some arrows in their quiver, too complicated to condense here.

A year ago, the Fed’s QE2 launched a huge rally in stocks, and due to the depressed nature of the market, any action here could trigger a sizable rally, but mostly because stocks are so compressed over such a short period of time.

I expect the rally to extend to DJIA 11,090 (S&P 500: 1147),but trail off after the Fed’s announcement at 2:15. This is such a news
sensitive market, that projection has room for error. Should the Fed stun the Street with big news, the market has room to run further.

Should the market be unable to stabilize here, DJIA 9,680 (S&P 500: 1050) is a good bet. I targeted this level as the next level of support in my Aug.1 blog should the first level fail to hold.

O.K, about you and the pain, angst, confusion, anger, and regret you must be feeling now.

This stuff happens on occasion, and it is scary stuff, because the unthinkable CAN happen as dominos tumble globally.

This one reminds me of October 1987 when the market indexes dropped 30% in six days with “Black Monday” plunging 508 points (22.6%) in that day alone. Reasons for the crash were different from today except the crash came after a sharp run up in the market and a softening in the economy.

A recession was expected to result from the carnage, but as a result of intervention by the Fed, it didn’t and the market renewed its bull market vigor, as did the economy.

As I have emphasized here repeatedly, the market finds a comfort level where it discounts current negatives, as well as those that are perceived. Obviously, the Street is worried about a sovereign debt meltdown in Europe – and that is worth worrying about,
but they have been wrestling with this problem for years and should be getting pretty good at damage control. It’s the unexpected that cuts your legs out from beneath you.

What a shame to waste a good earnings season. The Q2 earnings reports were terrific with three-quarters of the S&P 500 companies beating (low-balled) estimates with a total gain of 18% for the quarter, but who cares ?

At higher levels, bulls justified buying stocks based on average price/earnings rations going back 10 – 20 years. In times like this, “averaged” valuations for the stock market are ignored, because these are not average times – hellooo !

George Brooks

The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment
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